Singapore Post - UOB Kay Hian 2016-02-05: 9MFY16 Results Within Expectations; Synergies Ahead

Singapore Post - UOB Kay Hian 2016-02-05: 9MFY16: Results Within Expectations; Synergies Ahead Singpost SINGAPORE POST LIMITED S08.SI 

Singapore Post (SPOST SP) 9MFY16: Results Within Expectations; Synergies Ahead 

  • SPOST’s 9MFY16 net profit was within our expectation. 
  • Medium-term prospects remain positive and we see rising synergies in recent investments and redevelopment of SingPost Centre to drive growth. 
  • Maintain BUY with DCF-based target price of S$2.22. 


RESULTS 


• 9MFY16 in line. 

  • Excluding exceptional items, Singapore Post’s (SPOST) underlying net profit grew 1.2% yoy to S$121.8m. This accounts for 78% of our full-year forecast but its 4QFY16 performance tends to be seasonally weaker. 

• Margin pressure on elevated costs as SingPost invests for the future. 

  • Although 9MFY16 turnover grew 24% yoy, helped by strong e-commerce/logistics and the consolidation of Tradeglobal, underlying net profit growth was lacklustre due to a 3.3ppt decline in underlying profit net margin to 17.9%. This is because costs remained elevated due to the inclusion of recently acquired investments as well as cost pressure in volumerelated expenses. 
  • Compounding the lacklustre net profit growth was a 10% yoy decline in rental/property related income due to the redevelopment of Singapore Post Centre (SPC) Mall. 
  • E-commerce related revenue momentum remains strong, accounting for 33.4% of 9MFY16 revenue, compared to 27.1% in 9MFY15 and 25.7% in 9MFY14. 

• Dividend on track. 

  • A 3QFY16 dividend of 1.5 cents/share was declared, up 20% yoy (3QFY15: 1.25 cents). This is within expectations and SingPost is on track to deliver a full year DPS of 7.0 cents/share, implying FY16F dividend yield of 5.2%. 


STOCK IMPACT 


• Paring down GDEX for a tidy profit. 

  • On 28 Jan 16, SPOST agreed to divest a portion of its stake in GD Express Carrier (GDEX) for S$78.4m. 
  • The group is expected to record an estimated gain of S$64m from the disposal, which will be recognised in 4QFY16. 
  • After the sale, SPOST retains an 11.2% stake in GDEX and will continue to equity account GDEX (as it retains board representation) as GDEX will remain a key last mile delivery partner for SPOST. 

• Integration is next with no major strategic acquisition in the pipeline. 

  • SPOST’s near-term focus will be to consolidate and integrate the new acquisitions. Management is seeking to extend the completion date of Alibaba’s second investment agreement as regulatory approvals are still pending but in terms of collaboration with Alibaba, this is growing rapidly. 
  • As an indication, SingPost recently won a logistics partner award from Alibaba for its role in Alibaba’s “Singles’ Day” sale in Nov 15. 

• Clarification on selection of special auditor. 

  • Following concerns raised by the public regarding SPOST’s decision to appoint PWC as its special auditor, SPOST clarified the below points. 
  • First, it has “exhaustively” evaluated various options and concluded that the Big Four accounting firms have larger headcount pool, thus have the necessary resources to undertake the Special Audit in an extensive manner. 
  • Second, SPOST cited that all of the other three major accounting firms are already involved with the company in ways that make them unsuitable. 
  • Lastly, SPOST’s acquisitions of stakes in Famous Holdings, FS Mackenzie and Famous Pacific Shipping are not “interested person transactions”. 


EARNINGS REVISION/RISK 


• Adjusting earnings to reflect GDEX gains and slightly higher costs. 

  • We trim FY16- 17F net profit forecasts by 1-2% to reflect a slight increase in volume-related expenses, which we anticipate will arise from higher cost of sales following the integration of Trade Global. 
  • On our new estimates, revenue and earnings are projected to grow at a 3-year CAGR of 14.0% and 10.4% respectively. 


VALUATION/RECOMMENDATION 


• BUY with a DCF target price of S$2.22 (previously S$2.23). 

  • The recent sell-down has removed the froth on its valuations since the announcement of Alibaba’s initial entry into SingPost (at S$1.42/share). 
  • While there are some concerns over its “administrative oversight” in the disclosure of its previous M&A, we believe this has been priced in. 


SHARE PRICE CATALYST 

  • Higher-than-expected growth in the e-commerce and logistics businesses. 
  • Favourable findings from the special audit



Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-02-05
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.22 Down 2.23


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